What is actually going on with Big Companies & Tax?

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The big companies are in the news again about the levels of tax that they are (or aren’t) paying … these stories tend to read along the lines of:

“GIGANTIC ORGANISATION WITH £10 MILLION TURNOVER ONLY PAYS £200K CORPORATION TAX ... THAT’S 2% …”

One sentence, so many flaws …. !

1.      Companies pay tax on profit, not turnover

2.      Accounting profit is NOT the same as taxable profit

3.      Corporation tax rates change

Looking at these in turn:

Tax is paid on profit, not turnover

All businesses should know this – limited company or self employed, you are taxed on your profits. So headlines comparing tax to turnover are misleading to those who don’t run their own business and don’t know this important fact.

Profit and turnover are not the same, there are lots of costs that are offset to get to the profit figure – manufacturing costs, delivery costs, employee costs, property costs, legal costs, advertising costs etc etc.

Accounting profit is not the same as taxable profit

The profit figure in the accounts is prepared under GAAP (Generally Accepted Accounting Practice).  Without getting too technical, there will be non-cash items such as depreciation (spreading the cost of assets that the business uses over the life of the asset), provisions for warranties, provisions for dilapidations (costs to return a leased premises back to the condition it was in at the end of the lease).  These non-cash items are treated differently for tax purposes, for example, depreciation is ignored (added back to the accounts profit figure) and capital allowances are given and depending on the spend and the rules at the time, this can give a 100% allowance for the assets.  For provisions, broadly speaking, unless the spend is within 9 months of the year end then they are added back too.

This then gives a completely different profit for tax to the accounts.

Example:

Profit - £10,000
Depreciation - £500
New computer - £2,000

The accounts profit is £10,000 but the profit for calculating corporation tax will be £10,000 + deprecation that is added back of £500 less the cost of the new computer of £2,000 = £8,500, so £1,500 less. 

And this is without thinking about employee share schemes, historic losses, groups of companies, tax planning etc.

Tax rates change

The main rates* of corporation tax in the UK are 19% and will be falling to 17% from 1 April 2020, when I was a trainee accountant (1999), the main rate was 30% with a small companies rate of 20% and marginal rates between the two depending on profit levels (the year I was born the main rate was 52% and the small companies rate 42% … !!!).  Just compared to 5 years ago, the main rate was 24% and the small rate 20%, so a large corporation will currently be paying 5% less corporation tax now.

Moral of the story

As with most things in the news .. don’t take it at face value, check your facts, understand what you are reading and then form your own views and opinions!

* “Ring-fenced” companies have a main rate of 30% - these are companies that make profits from oil-extraction or oil rights in the UK or UK continental shelf. 

Rachael Savage